January 5, 2010

 

1) My Top Ten Surprises of 2010

My friend and former Morgan Stanley colleague, Byron Wien, now at Blackstone Group (BX), initiated this concept? a few decades ago, which I always find a useful intellectual exercise. The goal is to list events which investors believe are nearly impossible, but which have a higher probability of occurring than they think. To a hedge fund manager, this generates a risk/reward imbalance, which always interests me, and can present great trading opportunities. Often you can see this in option pricing, with ?puts? on securities managers see as ?sure things? being tossed away for pennies. I liken them to Einstein?s ?thought experiments.? Here is my own list for 2010.

1) A dramatic decline in the unemployment rate enables the Democrats to increase the number of seats in the House and the Senate in the November midterm elections. Obama?s popularity soars.

2) A ?Goldilocks? economy of huge corporate profits with no inflation gives the stock market boom another year of life, taking the Dow to a new all time high of 15,000.

3) Strong economic growth cutting the government?s borrowing needs and continuing deflationary concerns keep interest rates on 30 year Treasuries and home mortgages near century lows.

4) Reviving American economic prospects and early Fed move to raise interest rates cause the dollar to soar to parity against the Euro. Differential growth and deficit spending rates then cause the European currency to fly apart. Deutschmarks, French francs, and lira make a comeback as member countries revert to their original constituent currencies. Talks of dollar reserve alternatives die out.

5) The surge in Afghanistan succeeds through a combination of drone attacks and intimate, on the ground, presence in the villages, and the war winds down to a dribble of sporadic suicide bombers. Osama bin Laden is captured in the mountains of Pakistan and put on trial in New York.

6) An American victory in the Middle East triggers the collapse of the fundamentalist regime in Iran. A new reformist government promptly shuts down its nuclear program and establishes diplomatic relations with the US. Obama signs a trade agreement that paves the way for US companies to make a killing rebuilding Iran?s aging energy infrastructure.

7) Continued low subsidized interest rates and renewed first time buyer tax credits at both the state and federal level trigger a buyers? panic in the real estate market. Banks start competing aggressively for market share.

8) The global commodity boom ends as China?s stimulus spending program runs out of money. Gold, silver, and platinum crash. Burgeoning stockpiles of everything, from copper to iron ore, sugar, and natural gas finally overwhelm real demand, and prices crater. Speculative demand vaporizes.

9) Huge new offshore discoveries, great strides in alternative energy, and enormous efficiency gains made possible by a smarter grid trigger a collapse in oil prices to $20/barrel. All exploration and development grinds to a halt, and several oil independents go under.

10) Tiger Woods admits to a sex addiction in a ?tell all? episode of Oprah, and goes on to win every major golf tournament. He refuses to take back the sponsors who baled on him last year, replacing AT & T and Gatorade with Viagra and Flomax.

 

2) I am pleased to announce my affiliation up with Zero Hedge, the top financial blog on the Internet, which boasts 300,000 visitors daily.?? The underground site posts out of consensus and iconoclastic analysis, and has begun putting up my work on their home page. You can visit their innovative and thought provoking site by clicking here at www.zerohedge.com . It is cleverly modeled on the Brad Pitt cult classic Fight Club, with contributing staff writing under noms de guerre taken from the film. Zero Hedge has broken several important news stories since they launched in March, like Goldman Sachs? prosecution of a hapless quantitative trader who tried to defect to Deutche Bank with proprietary software. To get the flavor for what they?re putting out, read their top story of the year on how to prepare for the hyperinflationary great depression, which drew in an astonishing 65,000 readers, by clicking here . The site has also launched its DARPA project, which is attempting to create an alternative research data base that will replace the inferior and conflicted products now offered by traditional brokerage houses and rating agencies. To find my own work there, just do a search for my handle ?madhedgefundtrader?. Of course you, the paying subscriber to the Diary of the Mad Hedge Fund Trader, will continue to get my research first, weeks, and even months before it appears publicly, in order to maintain your trading edge.

 

3) Managed futures accounts run by commodity trading advisors (CTA?s) are increasingly becoming an important investment alternative for both individuals and institutions, says Adam Rochlin, the head of MF Global?s alternative investment strategies business in New York. They give access to sophisticated strategies like global macro and high frequency trading to individuals and smaller institutions that can?t afford the astronomical cost of running their own high tech 24 hour global trading desks. They can also give you a convenient vehicle for pure commodity exposure, like in energy and the grains, without having to endure the management risk of indirect stock plays. The managed futures industry certainly delivered the goods in 2008, the year from Hell, when they brought in double digit returns, while every global stock index was crashing. The big new issue is transparency, which CTA?s deal with handily by executing trades in accounts still under the investor?s direct control, instead of asking for funds to be wired to a distant unknown custodian. As the futures markets never shut down throughout the financial crisis, liquidity was never a concern. You can learn more about managed futures accounts by contacting Adam directly at 212-319-1375, or by e-mailing him at alternativeinvestments@mfglobal.com . To hear the complete interview with Adam on Hedge Fund Radio this week, please visit my website by clicking here .